Inflation Report February 2016 Supply and the labour market

Chart 3.1 Wage growth has slowed Average weekly earnings: total and regular pay (a)Whole-economy total pay excluding bonuses and arrears of pay.

Chart 3.2 The participation rate has been broadly stable in recent years Labour force participation rate (a) (a)Percentages of 16+ population. The diamond shows Bank staff’s central projection for 2015 Q4, based on ONS data to November 2015.

Chart 3.3 The drag from demographics on the participation rate is being offset by increased participation by older people Contributions to the change in the participation rate since 2008 Q3 (a) Sources: Labour Force Survey and Bank calculations. (a)Percentage of 16+ population. Decomposition calculated using published ONS age groupings. The small cross-product term, reflecting the interaction between changing demographics and age-specific participation rates, has been allocated to the contribution of the change in age-specific participation.

Chart 3.4 Unemployment has fallen further Bank staff’s near-term unemployment rate projection (a) Sources: Labour Force Survey (LFS) and Bank calculations. (a)The magenta diamonds show Bank staff’s central projections for the headline unemployment rate for September, October, November and December 2015, at the time of the November Report. The green diamonds show the current staff projections for the headline unemployment rate for December 2015, January, February and March The bands on either side of the diamonds show uncertainty around those projections based on one root mean squared error of past Bank staff forecasts for the three-month LFS unemployment rate.

Chart 3.5 Long-term unemployment remains elevated Unemployment rates by duration (a) Sources: Labour Force Survey and Bank calculations. (a)The number of people unemployed in each duration category, divided by the economically active population. Dashed lines are averages from 2002 to 2007.

Chart 3.6 Hourly productivity growth has been stronger than in recent years Measures of four-quarter labour productivity growth (a) Sources: ONS and Bank calculations. (a)Output is the backcast for the final estimate of GDP. The diamonds show Bank staff’s central projection for 2015 Q4. Adjusted for expected revisions following the incorporation of the latest ONS population estimates and projections.

Chart 3.7 Total factor productivity has accounted for most of the pickup in labour productivity growth Contributions to four-quarter hourly labour productivity growth (a) Sources: ONS and Bank calculations. (a)See footnote (a) to Chart 3.6. Percentage change on a year earlier. Total factor productivity is calculated as a residual. The diamond shows Bank staff’s central projection for hourly labour productivity growth in 2015 Q4. (b) Fixed capital stock, including structures, machinery, vehicles, computers, purchased software, own-account software, mineral exploration, artistic originals and R&D. Calculations are based on Oulton, N and Wallis, G (2015), ‘Integrated estimates of capital stocks and services for the United Kingdom: 1950–2013’, Centre for Economic Performance Discussion Paper No

Chart 3.8 Little sign of spare capacity within companies Survey indicators of capacity utilisation (a) Sources: Bank of England, BCC, CBI, CBI/PwC, ONS and Bank calculations. (a) Measures are produced by weighting together surveys from the Bank’s Agents (manufacturing and services), the BCC (non-services and services) and the CBI (manufacturing, financial services, business/consumer/professional services and distributive trades) using shares in nominal value added. The surveys are adjusted to have a mean of zero and a variance of one over 1999 Q1 to 2007 Q3. The BCC data are non seasonally adjusted.

Chart 3.9 The changing composition of employment continued to weigh on wage growth in Q3 Estimates of the contribution of employment characteristics to four-quarter wage growth (a) Sources: Labour Force Survey and Bank calculations. (a) Estimates are shown relative to their averages over 1995 Q2–2015 Q3. Estimates of the effect of individual and job characteristics are derived from a regression of these characteristics on levels of employee pay using Labour Force Survey data. The estimate of the total compositional effect is obtained by combining these estimates with changes in the composition of the labour force. (b) Other includes gender, region of residence, whether working full-time and whether in public sector employment.

Chart 3.10 Real wage growth is close to its pre-crisis average rate Regular average weekly earnings: real and nominal (a) (a)Whole-economy total pay excluding bonuses and arrears of pay. (b)Deflated by CPI.

Tables

Table 3.A Monitoring the MPC’s key judgements

Table 3.B Labour demand growth remains strong Employment growth, vacancies and survey indicators of employment intentions Sources: Bank of England, BCC, CBI, CBI/PwC, ONS (including the Labour Force Survey) and Bank calculations. (a)Unless otherwise stated. (b) Changes relative to the previous quarter in thousands. Figures for 2015 Q4 are data for the three months to November (c) Other comprises unpaid family workers and those on government-supported training and employment programmes classified as being in employment. (d) Excludes vacancies in agriculture, forestry and fishing. Average is 2001 Q2 to Figure for 2015 Q4 shows vacancies in December relative to economically active population in the three months to November. (e) Measures for the Bank’s Agents (manufacturing and services), the BCC (non-services and services) and the CBI (manufacturing, financial services and business/consumer/professional services) are weighted together using employee jobs shares from Workforce Jobs. The BCC data are non seasonally adjusted. (f) Net percentage balance of companies expecting their workforce to increase over the next three months. (g) End-quarter observation. The scores refer to companies’ employment intentions over the next six months. The scores are on a scale of -5 to +5.

Table 3.C Most survey measures point to little acceleration in wage growth Indicators of wage growth Sources: Bank of England, BCC, CBI (all rights reserved), CIPD, KPMG/REC/Markit and Bank calculations. (a) Unless otherwise stated. (b) Measures of expected wages over the year ahead for manufacturing, financial services, distribution and service sector, weighted together using employee job shares from Workforce Jobs. (c) Quarterly averages of measures for permanent and temporary placements weighted together using employee job shares. A reading above 50.0 indicates growth on the previous month and those below 50.0 indicate a decrease. The greater the divergence from 50.0, the greater the rate of change signalled by the index. (d)End-quarter observation for manufacturing and services weighted together using employee job shares. The scores refer to companies’ labour costs over the past three months compared with the same period a year earlier. The scores are on a scale of -5 to +5. (e) Pay increase intentions (excluding bonuses) over the coming year. Data only available since 2012.

Recent developments in average hours worked

Chart A Average hours worked had been on a long-term downward trend Average weekly hours (a) Sources: Labour Force Survey and Bank calculations. (a) The diamond shows Bank staff’s projection for 2015 Q4. Based on ONS data to November 2015.

Chart B Additional desired hours have declined recently Net additional desired hours (a) Sources: Labour Force Survey and Bank calculations. (a) Number of net additional hours that the currently employed report that they would like to work, on average, per week calculated from LFS microdata. Data are non seasonally adjusted. Calculation based on Bell, D and Blanchflower, D (2013), ‘How to measure underemployment?’, Peterson Institute for International Economics Working Paper No. 13–7.

Chart C Demographic changes have continued to support a rise in the share of part-time work Share of part-time employment: actual and demographic contribution Sources: Labour Force Survey, ONS and Bank calculations. (a) Demographic contribution to part-time employment is calculated by applying average age and gender part-time employment shares for 2002–07 to population data by standard age and gender groupings used in the LFS.

Chart D The amount of leave taken is recovering Average weekly leave (a) Sources: Labour Force Survey and Bank calculations. (a) Four-quarter average. Exceptional volatility in 1997 Q4, 2004 Q4 and 2005 Q4 has been smoothed by using the average of the adjacent quarters.